Court: Court of Appeals for the Ninth Circuit; August 27, 1999; Federal Appellate Court
The case involves allegations of misstatements and omissions in Dignity Partners, Inc.'s registration statement for its initial public offering (IPO) of common stock, filed with the SEC. Dignity specialized in purchasing life insurance proceeds from individuals with AIDS, providing upfront payments and assuming premium payments. Following the IPO, it became known that advancements in AIDS treatment resulted in patients living longer than anticipated, leading to substantial losses for Dignity and a significant decline in stock value.
Investors Hertzberg, Derosa, and Feinman, who purchased Dignity stock after the IPO but before the news of increased life expectancy and resulting losses became public, filed a class action against Dignity for violations of securities laws, including Section 11 of the Securities Act of 1933. Hertzberg contends that Dignity was aware of the longer life expectancy yet failed to disclose it in the registration statement.
The district court dismissed the Section 11 claims, ruling that the plaintiffs lacked standing as they did not acquire shares during the 25 days post-offering. A proposed new class representative who did purchase within that timeframe was later barred due to statute of limitations concerns. The appellate court reversed the standing decision for the original plaintiffs, thereby not addressing the statute of limitations issue.
Dignity had filed its registration statement on February 14, 1996, for approximately 2.7 million shares. Hertzberg asserts that the statement contained materially false information and omitted critical facts, seeking damages under Section 11 and other securities law provisions. He claims the company’s financials misrepresented its true value, particularly alleging that Dignity's adoption of an accrual accounting method concealed delays in collecting insurance proceeds and inaccurate life expectancy estimates, jeopardizing the company's financial health.
Hertzberg claims Dignity breached Section 11 by failing to disclose its inability to accurately estimate life expectancies, adverse trends in 1995, and non-compliance of its accrual accounting with Generally Accepted Accounting Principles (GAAP). Following the public disclosure of increased life expectancies for AIDS patients, Dignity's stock price dropped from $12 to approximately $6. In June 1995, shortly after the initial public offering, Dignity projected a quarterly loss of $10 million and subsequently announced it would exit the viatical settlement business, causing the stock to plunge to $1 before stabilizing around $2 when the action was filed.
Dignity moved to dismiss Hertzberg's Section 11 claims, arguing the named plaintiffs had not purchased shares "in" the registered offering. The district court ruled that because the named plaintiffs acquired their stock more than 25 days after the registration statement was filed, they lacked standing, leading to the dismissal of their Section 11 claims. Subsequently, Charles Steinberg, a class member who purchased registered shares within the 25-day window, sought to intervene as a named plaintiff. The court granted his motion on February 20, 1998, and the appellants amended their complaint to include him.
Dignity then claimed the statute of limitations barred the entire class's Section 11 claims. The district court found these claims time-barred, reasoning that the original named plaintiffs’ lack of standing did not toll the statute of limitations for unnamed class members. The court invited further briefings on whether to allow an immediate appeal. The parties agreed to final judgment on the dismissed claims under Rule 54(b), leading to a June 29, 1998 order stating "no just reason for delay."
The appellate court has jurisdiction under 28 U.S.C. § 1291 and reversed the district court’s decision. It reviewed the interpretation of Section 11 de novo, emphasizing that the statute allows "any person acquiring such security" to sue for losses due to misstatements or omissions, rejecting the district court's restrictive reading that limited standing to those acquiring shares within the initial offering period. The broad interpretation of "any person" was affirmed as consistent with its ordinary meaning.
The court interprets the term "any" in legal contexts as encompassing all individuals, not just some, particularly in the context of securities purchase claims. A person qualifies as "any person purchasing such security" if they purchased a security issued under the relevant registration statement, regardless of when the purchase occurred. The court emphasizes that Section 11's provision for damages, based on the price paid for the security, implies that recovery is available to all purchasers, not just those who bought in the initial offering. Dignity's argument, which relies on the Supreme Court's Gustafson decision, is found to be flawed. Gustafson addressed Section 12 of the Securities Act, clarifying that claims under that section are limited to those who purchased directly from the issuer, while Section 11 allows any acquirer of the security to sue. The differences in wording between the two sections suggest intentional legislative design, leading to the conclusion that Congress intended broader access to remedies under Section 11. Other circuits support this interpretation, having allowed recovery for aftermarket purchasers. Although some district courts have misinterpreted Gustafson, the prevailing view affirms that Section 11 permits claims beyond the initial offering.
A statute's clear language negates the need for further interpretation, but if ambiguity arises, legislative history supports Hertzberg's interpretation of Section 11 of the Securities Act of 1933. The House Report indicates that civil remedies under Section 11 are available to all purchasers, including those buying securities after the original offering, as long as claims are filed within the limitations period set by Section 13. This report explicitly acknowledges aftermarket purchasers as having a cause of action. Furthermore, the 1934 amendment to Section 11, which introduced a reliance requirement if an intervening earning statement was published, reinforces this inclusion of aftermarket buyers.
Dignity's counterarguments, based on comments regarding an alternate bill and references to new offerings, do not undermine this legislative intent. The SEC's amicus brief supporting Hertzberg's interpretation is granted deference, as it reflects the agency's informed judgment on the matter, distinguishing it from informal agency comments. The court determined that Hertzberg had standing under Section 11, rendering the issue of Steinberg's potential standing unnecessary for consideration.
The district court's reference to a 25-day period lacks clarity, seemingly derived from a regulation pertaining to Section 12 violations rather than Section 11. Dignity's assertion that all aftermarket purchases are excluded from Section 11 protections is not robust, and a mixed purchase scenario requires tracing stock back to the initial offering. The statute of limitations mandates that lawsuits must be initiated within one year of discovering misstatements or three years from registration, whichever occurs first. Dignity's argument regarding initial offering purchasers being overcharged by brokers is seen as implausible and inconsistent with Congressional intent to protect victims of fraud. The Supreme Court previously ruled that a private sales agreement executed long after stock issuance does not qualify as a prospectus. The court's decision is to reverse and remand the case.
